The immoral and irresponsible scourge of payday lending

One of the most damaging influences upon the more vulnerable communities amongst us is the terrible scourge of payday lending. If you’re not aware, this is the practice of making short-term loans in anticipation of the next “pay day”. The loans incorporate a very large “administration” or “establishment” fee and then high interest. The overall amounts repaid may not be too much but since they are repaid over a short term the effective interest rates are so high as to merit the descriptor “immoral”.

The reality is that payday lending preys upon the more vulnerable in Australia society. When I was ministering in Neutral Bay, an affluent suburb on the Lower North Shore of Sydney’s harbour, we simply didn’t come across these businesses. Now that we’re in Macquarie Fields, one of Australia’s more underprivileged suburbs, I am seeing many, many payday lenders and many, many people who are using their “services”. The reality is that better-educated, consistently employed people don’t need to borrow short-term. Even if they have cash-flow problems they have more alternative resources available to them and more awareness of other options. There’s a reason that Cash Converters don’t have a branch in Mosman or Vaucluse.

To demonstrate how pernicious this model of lending is, I’ve analysed a sample of the most prominent lenders in Australia. By “prominent” I mean “google for ‘short term loan’“. I’ve assumed a $300 loan over as close to 3 weeks as I can (since this, anecdotally, is typical of what our clients at Break the Cycle, Glenquarie are getting) or whatever terms the company would offer. All fees/interest are rolled in together (since the distinction is academic when you have to repay the loan). The short-term nature of the loan is the real problem since while the interest rates themselves are bad it’s the “loan establishment fees” of e.g. 20% that do the most damage. Imagine, 20% charged over a short period, and then high interest rates on top. I’ve not even included any late fees which are especially punitive.

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Nimble‘s rate is particularly crippling. The irony is that their current advertising slogan is “just move on” as though taking out a short-term loan lets you just “get on with life”. The reality, of course, is that all it does is delay the problem and make it far bigger when it crops up 30 days later and the first payment needs to be made.

Of course, at this stage the lenders will exclaim that they promote responsible borrowing (and yes, each one has a link to their policies which speak about being upfront about charges etc.). Some even link to the Australian government’s smartmoney site. Does this discharge their own culpability? Hardly. The reality is that those in financial stress often are aware, if only partially, of quite how expensive the process is. They just don’t have a choice about it. Yes, in one sense their customer has a “choice” but the reality is they are feeling like they have no choice at all and the payday lender provides a quick way out, at least in the short-term. There are other ways to make money that don’t exploit people at their most needy. Again, if you don’t think this is exploitation of the most needy then show me the Cash Converters shop in Mosman.

The rise is perhaps best showcased by online lender Nimble, which offers quick loans of up to $1200 that can be approved through its website within minutes.

Nimble is hoping to distance itself from an industry often criticised for predatory lending practices and says it does not target disadvantaged customers on welfare. The company’s chief executive, Sami Malia, said a typical Nimble customer earned $65,000 and was about 34 years old. There were some borrowers who earned more than $100,000.

“I shiver a little bit when I hear people talk about payday lending, because it has quite a negative stigma attached to it,” he said.

Despite this, Nimble’s product is similar to many other payday lenders. Borrowers seeking quick cash can get loans of up to $1200 in their bank account within minutes. The company’s marketing portrays itself as fun and cool, with quirky television ads and a chatty social media presence.

As Christians we have a particular indignation about these things. God simply hates the exploitation of the weak and vulnerable, not least when it comes to lending money.

Ex. 22:25 If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest.

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Lev. 25:35 “ ‘If any of your fellow Israelites become poor and are unable to support themselves among you, help them as you would a foreigner and stranger, so they can continue to live among you. 36 Do not take interest or any profit from them, but fear your God, so that they may continue to live among you. 37 You must not lend them money at interest or sell them food at a profit.

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Psa. 112:5 Good will come to those who are generous and lend freely, who conduct their affairs with justice.

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Ezek. 18.13 He lends at interest and takes a profit.

Will such a man live? He will not! Because he has done all these detestable things, he is to be put to death; his blood will be on his own head.

Prior to the 16th Century these and other injunctions were understood to ban all interest. The Reformation brought a different view, looking not so much at the plain meaning but seeking to understand the intent and particularly the emphasis on unjust exploitation of the vulnerable.

Calvin therefore argued for the need to probe deeper and ascertain the general principles that seemed to underlie the Old Testament ban on usury in its original context. It was the purpose of the prohibition, not the prohibition itself, that had to govern Protestant thinking on this matter. “We ought not to judge usury according to a few passages of Scripture, but in accordance with the principle of equity.” For Calvin, the real concern was the exploitation of the poor through high interest rates. This, he argued, could be dealt with in other ways—such as the fixing of interest rates at communally acceptable levels. Calvin’s willingness to allow a variable rate of interest showed an awareness of the pressures upon capital in the more or less free market of the age.

McGrath, A. (2007). Christianity’s Dangerous Idea: The Protestant Revolution: A History from the Sixteenth Century to the Twenty-First (pp. 333–334). London: SPCK.

Jesus, as He so often did, made the same point by not only repeating the proscriptions but also emphasising the positive loving way to lend,

Luke 6.35 But love your enemies, and do good, and lend, expecting nothing in return, and your reward will be great, and you will be sons of the Most High, for he is kind to the ungrateful and the evil. … 38 Give, and it will be given to you. A good measure, pressed down, shaken together and running over, will be poured into your lap. For with the measure you use, it will be measured to you.

God, through the Bible, encourages generosity to the needy since that’s the gospel!

2Cor. 8:9 For you know the grace of our Lord Jesus Christ, that though he was rich, yet for your sake he became poor, so that you through his poverty might become rich.

Of course the riches here are spiritual; a restored relationship with God and all the blessings that are associated with that restoration. But one vital application is financial generosity (2Cor. 8:7).

Payday lenders are the exact opposite of generous. They make extortionate profits on capital lent, and they make them off the most vulnerable (again, Cash Converters in Mosman, anyone?). It is a deliberate choice to exploit people’s weakness and hardship. They compound their guilt by presenting it as an “easy” solution and suggesting that you can “just move on”. It’s the financial equivalent of a drug dealer. It’s no excuse to point to “responsible lending principles” on your website and to “cap” the loans at only 250%, nor to claim that they are “only meeting a need in the market”. So are drug dealers. Somehow it doesn’t excuse them either. The fact that payday lending is legal is almost irrelevant. It’s immoral because it’s exploitative.

So what can we do? Here’s a few things to begin your list.

Be aware. Until I moved to ministry in a vulnerable area this really wasn’t on my radar. Now it is. But you don’t have to wait. Get your head around just how crippling the interest rates on these loans is.

Don’t blame the borrower. In our experience many of them simply don’t have a choice. Yes, they’ve made foolish choices, yes they may have made purchases they shouldn’t in the past. But they’ve been exploited by someone making the most of their relative position of financial power.

If you’re a Christian remember what grace is all about before you make the mistake of dismissing payday borrowers. The gospel is forgiveness and redemption given to the undeserving and helpless; to those who are culpable for the situation they’ve got themselves into but are also slaves to a greater power. If you’re not a Christian then I’d love you to understand that one of the ways that the Bible expresses the great news of Jesus is the showering of spiritual riches upon the systemically spiritually poor (2Cor. 8:9).

Speak about it to others, particularly the media and politicians. The reason that payday lending has an increasingly poor reputation in the UK is that the Archbishop of Canterbury got onto a campaign that was swelling up. If we can make payday lending repugnant amongst our opinion makers then we’re a long way there.

Send people to better options. At Break the Cycle, Glenquarie we manage a portfolio of No-Interest Loans through Good Shepherd Microfinance, the capital supplied by the NAB. Other organisations help with budgeting and getting proper finance plans in place. We love the work of Christians Against Poverty/CAPMoney. You might also like to check out YouNeedABudget. The answer to a cashflow crisis is a better short-term response that must be coupled with a long-term assistance with budgeting and money-management; empowerment, not sweeping the problem under the short-term carpet.

I’m hoping in the New Year to keep banging on about this and other ways the most vulnerable amongst us are badly done by.

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Hi David
This is really interesting. Does your NILS scheme make allowances for short term loans or is it just for one off capital items? Is there a ministry there to "undercut" payday lenders by setting up something which still charges interest but at a reasonable level?

hi Eddie. Yes, there's plenty of flexibility under the lending guidelines. Part of it is working out a repayment schedule that's realistic. The loans are for white goods, car rego etc. And yes, the intent is to deliberately undermine the payday lender and I'm sure there's a potential ministry, as the Church of England have explored, to set up community loans.

My wife works in financial counselling (is soon to be accredited) and also volunteers with NILS. She tells me that one of the problems with NILS is that it takes a minimum of two weeks to get the money. Sometimes people have left the “need for money” to the last minute and therefore cannot wait that two weeks. Other times, an unexpected emergency forces their situation. (There may be negotiations in the pipeline to overcome this situation.)

The other issue for *some* people is that the money doesn’t go to them (we both think that’s a good thing), but rather goes to the vendor or provider of the goods or service.

It also appears that different NILS providers have different criteria and so lend for different things.

hi Andrew.
We try to have a 1 week turnaround between interview and providing the loan. We raise a cheque directly to the vendor.
Yes, different NILS providers have slightly different criteria but our experience is that we’re able to help a lot of people.

I think you forgot the part where God says it is ok to charge interest when loaning to non-Israelites.

Do you think it is ethical to charge different interest rate base on people’s ethnicity?

“Do not charge a fellow Israelite interest, whether on money or food or anything else that may earn interest.
You may charge a foreigner interest, but not a fellow Israelite, so that the Lord your God may bless you in everything you put your hand to in the land you are entering to possess.” Deuteronomy 23:19-30

no, didn’t forget it. Just didn’t want the post to get too long. I think it’s an important part of the topic and actually goes towards demonstrating the point being made about looking after the needy in our community.

Since you’re such an objective reader of the Bible, perhaps you would let us know how you understand this distinction to function, especially given that the same Torah expressly encourages responsible and generous lending coupled with regular jubilee amnesties on debt?

I notice how you avoided my question. This was not about becoming/not becoming Israelite. So is it ethical for lending agents to offer interest free loans for members of their religion and higher rate for other people? (i.e. discrimination based on religion)

If you dare to answer my question then I can try to explain how “this distinction [of fellow Israelite/non-Israelite] to function”.

No, I didn’t avoid the question. I clarified the issue since you had made a pretty basic mistake in your exegesis.
so you’re now asking a different question? One about religion and not ethnicity? In which case the answer is “yes, the Bible says clearly it is ethical (indeed encouraged) to charge no interest to your fellow Israelite but to charge regular interest to a non-Israelite. I get lower rates on all sorts of things from a whole bunch of people because they like me or want to support me. That doesn’t mean I’m being unfair to the person who gets the regular rate (they get exactly what everyone else gets), it just means that the person with the discount gets shown some grace.

Jon, just to add to David’s point: If you read further in the Old Testament law you will see that God also mandated protections for those who were outsiders in Israel. Yes there were certain special benefits for those who chose to become Israelites, but in fact most of the protections applied to everyone, aliens included. Note (i) the special protections given against mistreating (Hebr. “yanah”) the alien come just before the provision not to charge interest to a needy Israelite (see Exodus 22:21-27) and (ii) “yanah” included mistreatment through the charging of excessive interest or any interest to a destitute person – see Ezekiel 18:12-17.

The answer to your question should be obvious – yes it is ethical to discriminate in some circumstances. The modern phobia against all forms of “discrimination” gets only limited support in the Bible.

MichaelA, is it ethical for lending agents to offer interest free loans for members of their religion and higher rate for other people? (i.e. discrimination based on religion)

Can you give some examples when it is ethical to discriminate based on religion and/or ethnicity. (Make the examples where you should be discriminated).

Thanks for acknowledging that “the modern phobia against all forms of “discrimination” gets only limited support in the Bible”. Clearly Australian laws and Bible don’t agree when it comes to discrimination.

“is it ethical for lending agents to offer interest free loans for members of their religion and higher rate for other people?”

Why wouldn’t it be?

“Can you give some examples when it is ethical to discriminate based on religion and/or ethnicity.”

See above. What is the relevance of this anyway? I thought we were discussing God’s commands to Old Testament Israel, which included (a) not charging interest to needy Israelites; and (b) not oppressing or mistreating anyone, including non-Israelites.

“Clearly Australian laws and Bible don’t agree when it comes to discrimination.”

Note that I did not refer to Australian laws but to “the modern phobia” – they aren’t necessarily the same thing. And Australian laws don’t prohibit “all forms of discrimination”. But even if correct, does this really make any difference to David’s point?

Thank you for letting us know that you think it is ethical to discriminate based on religion. I assume you are also ok that Christians are mistreated in Islamic countries and support the discrimination against Christians. Based on your answer I think you assume that discriminating based on religion is “not oppressing or mistreating anyone”.

I hope one day you will read history and eventually understand why this discriminating is unethical.

I didn’t claim that Australian laws prohibit “all forms of discrimination”. They don’t. For example religious organisations are allowed to discriminate when it comes to hiring.

Why is it relevant – I wanted to point out that the Bible is a poor guide when it comes to get advice about lending.

MichaelA, people who discriminate are often at a loss as to what your point is when talking about discrimination. They think it is ethical to discriminate based on religion unless it is they who are discriminated against.

I quoted you that God’s commands to Old Testament Israel, which included “not oppressing..anyone”, but you claim I haven’t read what you wrote. The reality is if you do religion based discrimination it oppresses other people.

You said: “I haven’t seen any reason or basis from you to support such an [non-discrimination] argument”
I pointed out that discrimination is unethical (lending rates based on religion), but I doubt you have or will see it as you are in the Christian privileged position.

You said that you are “well versed in history” so how successful are/were these nations which discriminate?

“Israelites” is used as ethnonym (applied to a given ethnic group) and it composed the followers of their religion. The Greek term ethnos is literally “nation”. “fellow Israelite” = person in your [12] tribe and following your God, child of a Israelite woman. So maybe you could show me where I exegete “fellow Israelite” incorrectly?

But thank you for letting me know that according to you discrimination based on religion and/or ethnicity is ethical. This seems so un-Australian to me and our laws.

Your example of you getting lower rates because people like you is of course non- sequitur. It is not systematically applied to group of people and it’s not based on protected attributes in our law books. I sure you know this.

What I’m getting is that we need to help poor people in a same way regardless of their attributes. Maybe we should limit our gambling habits and regulate loan sharks better, however the Bible offers a poor guide and can be only used if you ignore verses that discriminate. Rights should be the same for all Australians.

“Israelites” is used as ethnonym (applied to a given ethnic group) and it composed the followers of their religion. The Greek term ethnos is literally “nation”. “fellow Israelite” = person in your [12] tribe and following your God, child of a Israelite woman. So maybe you could show me where I exegete “fellow Israelite” incorrectly?

Very happy to state it all again. You described the distinction between Israelite and Gentile as purely ethnic. Your exact question was “Do you think it is ethical to charge different interest rate base on people’s ethnicity?”

Now, I see that, upon correction of your exegesis, you have shifted your question to address the reality that I pointed out to you. Let’s not compound the error by pretending that’s what you meant all along. You referred to ethnicity. I corrected you and pointed out that it was about religion, not necessarily ethnicity since Gentiles were welcome to become Israelites.

As your for more general refusal to read the text in anything other than a hostile and deliberately minimalistic way, I’ll leave you to Michael’s comments. Personally I get bored by commentors who do little more than demonstrate that they have an axe to grind and think that they are experts in a field when others actually have a far greater degree of knowledge. But sadly that appears to be a common trait amongst the pop-athesits. They’re all experts in the Bible, knowing far more than those with a full graduate and postgraduate education in the topic. I guess some of us will never get to their levels of expertise.

You have clearly studied the Bible more than I, and I’m happy to be corrected. I’m happy to take your exegesis that “Israelites” is a reference to “religion”.

The point was that you were ok that different lending rules apply to Israelites and non-Israelites. And thank you for letting me know that in business dealings according to you discrimination based on religion is ethical.

Jon, again you seem incredibly eager to draw conclusions that aren’t warranted by either the text of the Bible or my own words.

Now, for absolute clarity, you assert,

thank you for letting me know that in business dealings according to you discrimination based on religion is ethical

Everyone discriminates every day on all sorts of bases. Some of it is wrong, some of it is entirely correct or appropriate. Last month I needed a new hot water heater. I was sent to a particular plumber who had a relationship with the church and charity I look after. When I introduced myself his response was “don’t worry, we’ll look after you”. And he did “look after” me as others have before him because of the work that I do. I’m very grateful for it. It’s completely within their discretion and what it signals to me is a wide groundswell of support and participation in the work that we do.

Now this is simply what the Scriptures are saying in this case. God implores the Israelites to “look after” their fellow Israelites. Give them preferential rates. You may consider that “immoral” or use the bogeyword “discrimination” but the reality is it’s a clear direction to them to show grace and favour to their fellow Israelites. And unless you’ve never done anyone a favour because you had an affinity to them (or think it’s immoral), I not sure why you’re complaining. Unless it’s because you have a predisposition to attack the Bible.

David Ould, I did not need to draw conclusions, I just stated back what you wrote. If that statement is wrong, then just state that giving different lending rates based on religion is unethical.

I don’t know how you live or with who you hang out with, but I certainly do not “discriminates every day”. I try to make sure I never do that. I also don’t hang out with people who “discriminate every day”, I seek that company of people who are against discrimination. And even if everyone would do it like you claimed, it would still be unethical.

I understand that you are in a privileged position to get “look after” by Christians, but that is a false analogy. What the correct analogy would be that you were advocating that plumber should have one price for Christians and other for non-Christians.

And no. As a consultant I have never done “a favour” to a particular group of people (Israelites, Christians, based on skin colour, based on sexual preference, etc) as you advocated. So I guess I can complain (and even if I had done in the past, I don’t get why I would be able to complain about it now. Even Paul changed his ways and you take his word seriously.)

You said “Everyone discriminates every day on all sorts of bases. Some of it is wrong”
What kind of discrimination do you think is wrong, and where do you get that?

I understand that you are in a privileged position to get “look after” by Christians, but that is a false analogy. What the correct analogy would be that you were advocating that plumber should have one price for Christians and other for non-Christians.

Of course you do, from the moment you get up in the morning you choose to enter into certain relationships and transactions with some people that you don’t with others.

It starts with the way that you treat your wife (favourably, no doubt), then the preference that you give you your children, and then on to whichever newspaper you choose to buy, where you go for lunch and who you choose to cut your hair.

At each stage you choose to favour one person over another. We do it all day, and usually on the basis of relationships that we are happy to be in.

Now, of course, if you treat your wife just the same as the man you walk past at the bus stop then I’ll eat my hat and recant everything.

The reality is that you are deliberately reading the very worst into this Biblical command for an Israelite to be generous to his fellow Israelite and turning it into a command to offer punitive terms to a gentile. And you do this despite having been corrected on a number of occassions by others. Your tenacity speaks volumes.

Yes David, l too have thought these payday lenders are a scourge to the lowly paid and weak. As a matter of fact l think it is immoral of commercial TV stations to even air these ads which tempt and prey on the poor.

I don’t know the answer, but from my observations we have bred via bad parenting, bad schooling and bad government a portion of society which also think it is their right to get handouts for doing nothing.

I do recall Jesus saying something along the lines of “unless you become as little children you will not enter the kingdom of heaven”.

I also note that none of the apostles went to uni.

In my mind, as a teacher, you have to put things across in very simple terms for the sake of the unlearned, and as well embrace the unlearned.

If your blog is only for the saved and learned it is not going to reach the perishing and if it is only for the learned maybe there needs to be a password to get onto your blog which is only given to those who are graduates and post graduates.

As a minister I think we have to agree to disagree sometimes and not come across with an “I’m better than you attitude”.

Anyway, l have a sense of humour so l hope l am not blackballed for this as l do find your blog very informative and a barometer of what’s going on in the world.

I think you misunderstand. Jon is well known to some of us here. He makes a habit of seeking to attack Christianity wherever he can find it online, using the normal pop-atheist tactic of selective reading, failing to take any account of widely-received hermeneutics and generally acting as though he knows far more than those who actually have spent a great deal of time studying these matters. In this place he will be consistently answered in this way.

I want to raise issue on three comments you’ve made: that payday lending “preys upon the more vulnerable”, the use of “effective percent per annum” and that lenders make “extortionate profits on capital lent”. For the purposes of disclosure: I operate a lending company that provides small amount credit contracts, have over 15 years experience in the industry and have been involved at industry representation level. My company does not do “payday loans” in the time frames you’ve suggested. We provide small amount credit over terms of six to nine months.

First, “preys upon the more vulnerable”. This is emotive language which is designed to skew perception. Using this methodology you could say that doctors “take money from the sick”, that landlords “take advantage of the homeless” and restaurants “prey upon the hungry and thirsty masses”. It’s true that the products provided by lenders are not required by everyone, but they are offered on the same terms to everyone. Those products were designed to fill a void in the financial services market. Lenders market to their customer base – they don’t create it. I think it’s reasonable to say that no one took out their first “payday loan” unless they felt that they needed it.

As for the attendant comment about the location of lenders – lenders operate where their customers are likely to be. It’s a simple fact of commercial operation. You don’t open a petrol station if there are no cars around, or a child care centre in a retirement village.

Next, the use of “effective percent per annum” is misrepresentative and biased. Payday loans do not have repayment terms designed over the course of a whole year, let alone multiple years. Therefore taking what charges they do have and expressing them yearly requires that the charges be multiplied, making them bigger and scarier. Even ants look scary under a microscope. To explain the logic with a simple sum – if I loan you $100 today and you repay me $101 tomorrow in final satisfaction ($100 principal + $1 total charges), the percentage per annum charge on the loan is 365%. So $1 = 365%. 365% looks scary and gives you no information about the actual charge in isolation.

Percentage is not representative of anything by itself. It’s a unit of measurement. It must be related to something in the form of “x% of $y” to have any meaning. People simply assume what it means and relate it to other percents they know of – particularly home loan percentage rates. That’s comparing apples and oranges.

You also commented on loans being capped at “only 250%”. Apart from the above argument, small amount credit contracts are capped at 100% of amount obtained (excluding enforcement costs) by law.

Lastly, you claim that lenders make “extortionate profits on capital lent”. I’d like to know where you get your facts from as, apart from a couple of large, publicly listed lenders, most lenders do not publish their financial data. Only one government study on profitability in Australia has been done to my knowledge, and it has never been released (and is not able to be obtained under freedom of information).

The fact is that many lenders are leaving the industry as it is unprofitable unless you are massive in
size and can make a level of profit through ‘mass production’. We’re a mid-size lender and are barely keeping our heads above water.

Just look at the table included in your article of ‘total fees and charges’. The fees quoted (in dollars) are less than the callout fees of most tradespeople. In fact, http://www.plumbingcosts.com.au says that the range of callout fees for plumbers is usually $82.50 to $104.50. And then they charge between $132 and $143 an hour.

I think you’re focussing too much on an unfair, extrapolated interest rate rather than looking at the real figures and the mandatory work and expense involved.

hi “senseandlogic”. I normally ask commentors to use their real names but I understand that you might feel this is a forum in which you’re in the minority.

Thanks for commenting here. As you might expect I’m going to respond to your comment.

First, I’m not sure that you actually make any substantive argument against my claim that payday lending preys on the most vulnerable. It’s a simple fact that these organisations proliferate in lower socio-economic areas. At our onsite charity we are seeing firsthand the carnage wrought by these loans. People who feel they have nowhere else to go end up borrowing at what I still maintain are extortionate rates.

As for your claim that they simply ” fill a void in the financial services market”. I agree. But they do so in a wholly irresponsible way. I put it to you (as I stated in the OP) that drug dealers fill a void in the pharmaceutical products market (as they certainly do in our suburb too). That there is a gap in any market does not automatically make the filling of that gap a moral activity.

But your main argument is that my use of annualised interest rates is somehow “misrepresentative and biased”. I would actually argue the contrary. By restating the total paid by a customer of a payday lending in terms of an annualised interest rate there is a very useful and entirely understandable comparison that can be made against other sources of capital. The reality is that very high charges recouped over a short period of time lead to a high annualised cost. You will note that I did not compound the charges, merely extrapolated them out over a year to represent a true effective cost.

I recognise that these are short-term and unsecured loans. But the amounts recouped by the lenders are, frankly, preposterous. And they are recouped from the most vulnerable.

The comparison against professional tradespersons is not like-for-like since these are different products. Professionals provide a service and get paid accordingly. If their charges are extortionate then let’s challenge them on it.

Payday lenders are providers of finance and their costs ought to be compared to their own industry – the financial services industry. Years ago I got a degree in Accounting and Financial Analysis and then trained as a Chartered Accountant. It was drilled into us that you compare the relative costs of financing something by seeking an equal baseline to compare. Annualised interest is the standard we all use, don’t we? You look at your cost of capital as an annual figure and then the annualised gross returns you can get on that capital when lent on. The margin between the two might be tight with the current competition in the lending market. Payday lenders have a much higher margin between the cost of their capital and the returns generated by that capital.

I’m sorry that you’re only just breaking even. But I’m very glad that by staying out of the payday loan business you’re not making a profit at the expense of the most marginalised in society. Every day we see the damage caused by these businesses, lives ruined when vulnerable people borrow at great cost because they think they have nowhere else to go. I can’t count the number of children I now know who haven’t eated meals because a payday loan had to be repayed. Rather than defending them I hope perhaps you might consider seeing them as the sharks that bring your own business a bad name.

Thanks for responding. I’m happy to give my real name (Rob Legat), the field pre-populated when I entered my email address.

My first argument was that using the word “prey” was an unfair attribution. I’ve never seen anyone forced to take out a loan, let alone a lender waiting in the bushes to tackle the next vulnerable person who walks past. You say “prey on the vulnerable”, I say “conduct business in their customers’ location”. One is designed to be evocative and emotional to provoke a response.

You cannot compare drug dealers and licensed lenders conscientiously. Lenders are regulated heavily by the government and may only provide credit once a proper assessment of an applicant’s financial needs and circumstances has been undertaken. Lenders are more akin to pharmacists than drug dealers, to use your analogy.

If stating an annualised interest rate is “very useful and entirely understandable”, please explain how it is so for the percentage rate of 365% in my example of the $1 charge for 1 day on a $100 loan scenario.

I fail to see how a comparison to tradespersons is inadequate. They provide a service and get paid accordingly – lenders provide a service (the use of money) and get paid (accordingly). You can’t challenge a charge as extortionate unless you first have an understanding of the costs of provision of the service.

It’s interesting that you state you trained as an accountant. You would therefore understand that the costs of providing a loan need to be amortised into the repayments over the term. A VCAT case a few years back agreed that the cost of assessment and provision of a consumer credit loan was in the vicinity of several hundred dollars (pre-current heightened regulations), and the work needed to be performed is not dissimilar to level needed on a home loan. If even $100 is a suitable figure as a bargain basement amount – that is still more than is being charged by any of your examples.

While we don’t lend on typical payday lender terms, we operate under exactly the same costs and regulations.

That makes sense on the name. The blog draws upon gravatar and then autofills accordingly.

Let me tackle your comments.

With regards to “prey”, I think I’m justified since while you’re correct that “nobody is forced to take a loan”, your statement doesn’t take account of the pressure that the most vulnerable fall under to service their expenses. They see payday lending as the only way out of an already difficult situation. They don’t want to borrow but the punitive effect of not paying a red bill forces them into a transaction they don’t want to enter into normally. The payday lender makes themselves available and is therefore opportunistically taking advantage of the lack of options available to an under-empowered customer and rorts them.

Don’t get me wrong. I’m all in favour of a free capital market. My objection is to the incredibly high charges being exacted from customers who really don’t have any other alternative. It’s fascinating, don’t you think, that every payday lender I’ve analysed charges the top amount allowed by current legislation. If there were a really competitive market then surely we’d see some downward pressure? But the reality is that there is very large demand, but not a totally free demand. It’s a captive market of customers who need to buy the product but have nowhere else to go.

As for the comparison with drug dealers, my point (again) was to challenge the notion that the customer is “free to choose”. A drug dealer’s “customers” are all “free” but the reality is that they are not. Circumstance has placed them in a situation where they feel compelled to purchase and the dealer takes advantage of this. The payday lender is in exactly the same situation. Despite your protest, the customer feels compelled to purchase – they are simply unaware of any other alternative.

In terms of actual costs and your specific question of $100 over 1 day with a $1 charge, what is the cost to the customer?
Well, I put it like this. What is the cost of capital to the customer and what is that cost in a standardised form that we all recognise?
Well, if the customer were to roll over the principal (without even capitalising the charge) then the cost over one year of servicing the $100 loan would be $365 or 365%. So yes, that’s their annualised cost of capital to compare to any other form of lending. You baulk at the figure but it’s an entirely accurate way of describing the situation and brings clarity. Financial returns are always calculated in these relative terms, not absolute figures.

Your final point is about the costs of providing the loan. Nimble, who are top of the list in terms of charges (by virtue of charging the max 20% “setup fee” coupled with a short term on their loan) are a good example of a company who have refined a computerised assessment procedure. Similarly other companies offer a typical “money within 2 hours” product. You may be very conscientious in your work a I imagine you would never turn around a loan in those timeframes. But the reality is that the product offered by it’s very nature doesn’t incorporate those massive manually-intensive assessment procedures.

And look, even if they did and it really did cost over 150% of the principal value to evaluate and administer the loan, my basic critique would still stand. Even if every cost could be justified it is simply irresponsible to the point of being immoral to offer such an expensive product to such vulnerable people. Go find another way of making money, I say, that doesn’t squeeze money at such high rates out of the most marginalised in our society. The reality, I suspect, is that there are actually good margins in this business where the customer base is so enormous. That’s why our local high street has so many providers with more opening up.

This is really about moral responsibility. Even if we grant all your arguments, we still end up with a product that does immense social harm. At that point surely there is a moral imperative not to offer the product?

Or perhaps you don’t believe that the product does harm? In which case I’d be delighted to introduce you to a few case studies.

Hi Rob,
In round terms and in my mind the Cash Train or Money Train guys and the like ARE opportunists mainly preying and tempting those who are weak and can ill afford the debt. And if not why is there an advertising blitz on TV at the moment at the time of year when everyone wants to party and have money for presents in this “l want it, and l want it now age”?

Yes, there will be some sensible and responsible in the community who genuinely need money short term – say for someone who is about to start a new job and needs a car payment to stop their car being repossessed, but l bet if you did the analysis the mainstay customers would be low socioeconomic who live day to day or week to week and dare l say it for a good time using the money for alcohol or drugs, or to make up the shortfall when the rent money has been spent on these things.

If you did the in depth analysis and saw the misery that this lending produces a man has to ask himself “Can l continue to be a part of this from a moral stance”.

Yes we can justify the high cost of lending all we like and similarly l suspect brothel owners do the same cost benefit analysis, however the bottom line question men in this industry have to ask themselves is “Is it right?” and “Am l happy with myself?”

It would appear then, when all boiled down, that your argument is a moral one – to which you have attached facts in support. That’s fine because it’s your right to do so.

I, however, think that it is an overly simplistic view which focuses on the improper use of the loans. I don’t doubt that you can show me case studies. I’ve seen lots of them. I deal with lots of them. I’ve yet to see one person whose dire straits were predominantly caused by a lender, or who went from being fine to being in dire straits because of a payday lender – all of them were ultimately in dire straits to begin with for other reasons. Added to that, many of the ones that I have personally seen have involved some form of dishonesty in application in order to get the loan and have ended up not paying at all. It’s unfair to simply see a payday lender involved somewhere in the mix and then target them as being the fault.

As to your comment about competition not forcing prices down, there’s a simple reason for that. The 20% + 4% model is too low for the majority of lenders to be profitable. These figures, from information I have on good authority, were suggested by one major lender and not checked at all by government as to commerciality – and that much is apparent from the regulation impact statement. To explain why that was an overall bad idea, it’s like setting the price of milk by asking Woolworths or Coles what it should be, and then telling corner stores that’s what they can charge.

If you don’t think the industry should exist, that’s fine. However, please don’t dress it up in a bunch of ‘facts’ when it really comes down to a moral stance. There are lots of alternatives to payday lenders – ranging from Centrelink advances to NILS/LILS schemes to hardship schemes with utilities. We even have to, by law, put a warning on our doors telling people to go elsewhere. The fact that they still come in means there is either a necessity or a want for the product, I’d be happy to provide a cheap product, undercut the competition, get market share and help everybody out – but it’s just not going to happen in the current regulatory environment.

With respect it’s more than just a moral argument with the “facts tacked on”. It’s both morality and facts, with the facts being consistent with the moral argument.

When you write,

I’ve yet to see one person whose dire straits were predominantly caused by a lender, or who went from being fine to being in dire straits because of a payday lender – all of them were ultimately in dire straits to begin with for other reasons.

it’s a bit of a straw man. I’ve never claimed that the problems were caused predeminantly by the lender. I trust I’d been clear that my issue was that those lenders make advances to customers who are already in hard straights. And even if they weren’t, the effective interest rates are paticularly punitive.

In terms of the arguments around the 20%/4% rates, I’m sure you’re right.

Finally, the alternatives. Centrelink advances are limited. NILS are a better option but can only be used for longer-term purchases such as white goods or rego/insurance. The charity I chair currently has about $100k of such loans out in our local community through the auspices of Good Shepherd Microfinance (mentioned above). Hardship schemes with utilities are also available – we currently administer government funds under the administration/partnership of Anglicare. They’re all better options. Their availability doesn’t negate the moral responsibility that lenders have. And the reality is that many are not educated as to the possibility of procuring such alternatives.

Again, I’m pleased that you’d want to provide a cheaper product. My point is that when payday lenders choose to lend at punitive rates (even if they justify them in terms of overhead or direct cost) they still retain a moral responsibility for the effect of their expensive financing.

David, what is your source that the payday lenders make “extortionate profits”? Are these companies really more profitable than the big banks; I would expect high overheads and high defaults to accompany – and to some extent explain – those high interest rates.

I should probably have read all the other comments first – I see my question about “extortionate profits” has already been asked. I’m not convinced this is an industry which should be shut down; the financial demands experienced by the poor aren’t the fault of these lenders; they are simply providing a service, and I suspect the alternative to them would be worse.

Thanks for commenting. I’m afraid, having seen firsthand the damage caused, I don’t think it can simply be spoken of as “providing a service”. Yes, there are worse alternative and the lenders may not be always responsible for the poverty in the first place.

But they set up shop where that poverty is and they know full well that their customer are poor. That’s unconscionable in my book. Knowing that your product does damage but still providing it because the alternatives might be worse or your customers have already dug themselves into a hole before you hand them a new short-term shovel.

I’ve just finished putting together some data which I think may challenge some of your thinking. Cost argument aside (which has been covered but is apparently not able to be resolved), the concept that borrowers are generally ‘poor’ isn’t true.Your experiences appear based on seeing the outcome of the downside of lending; which you are extrapolating as a comment against all of the industry.

I’ve just finished reviewing the figures on 345 loans over the 2012-2014 period where the borrowers were/are in severe default (either greater than 90 days behind and/or disappeared). Greater than 90% of these are not servicing their loans to any degree.

Every borrower was put through a complete credit assessment (as required by law) in which we took a comprehensive budget, verified against income evidence and bank statements. These figures were then assessed against ABS spending statistics and an affordability amount was calculated.

Affordability was determined by calculating income less expenditure, comparing that figure against both a protected earnings amount (PEA) model and a discretionary earnings model, and taking the lesser of those two as the amount of affordability. Some adjustment was made for older contracts because of changes in the models over time (we’ve tightened up both significantly) such that some now failed the PEA model and the discretionary model figure was used instead. No contracts failed both models on re-calculation.

For a baseline, my own personal affordability level using the same calculator is $26.21 per week.
The range in repayments of all loans was $12.00 to $210.00 per week, with a mean average of $49.48 ($30.00 mode).
The range in affordability of all borrowers across all loans was $23.38 to $605.68 per week, with a mean average of $112.51 ($40.75 mode).
The average amount left over after deducting repayments from affordability was $62.92 per week (mean), $19.26 (mode).

217 (62.9% of 345 loans) made 5 or less repayments on their loan before going bad, of which:
63 made 0 repayments
45 made 1 repayment
40 made 2 repayments
30 made 3 repayments
29 made 4 repayments
10 made 5 repayments

Further, of interest, all borrowers were informed in writing of the availability of hardship provisions. 330 did not raise hardship.
9 received hardship changes in line with their request (or greater).
6 raised hardship but failed to provide reasonable supporting information after request.
0 who provided supporting information were refused their requested change.

It must be remembered that these are the worst of our borrowers. I obviously can’t account for what other lenders are doing, but your claims on targeting poverty don’t stack up in my experience – not when the worst we have are better able to afford a loan from us than I am.

Rob, thanks for this. Genuine question: I thought you said you weren’t in the payday lending business. How should these figures, therefore, be compared to the very short-term options provided by the payday lenders?

What is the 345 as a proportion of the total ledger, both in numbers of loans and absolute dollar value?

I’m not sure that I’ve ever claimed that the customer base of these lenders are “generally poor”, but that the poor in particular suffer under them. The more advantaged people are, the less likely they are to suffer from a payday loan.

I’m pleased that you make hardship options available. It’s shocking, isn’t it, that so many don’t take them up. Again, I think that points to the vulnerability of many of the people in this sort of situation.

I realise that you’re seeking to defend your own business and I’m sure you run a legit organisation and you’d never knowingly lend to someone you thought would just get in deeper trouble. Our experience is that the payday lenders are not anywhere near as scrupulous.

It does depend on how you define ‘payday’ loan – it has apparently crept out to encompass any non bank lender in the sub-$5,000 consumer range. The comparison lays in the coverage of the law. As I said before, we come under the same regulations and costs as payday lenders. The government regulates based on principal and term. Our general lending range is from $500 to $2,500, which puts us predominantly in the SACC range (up to $2,000) and a little into the MACC range ($1,601 to $5,000). The majority of our loans therefore are restricted under the SACC 20/4 cap.

As for the proportion, I don’t have those figures yet as I’m only part way through my project. The 345 are being analysed in an effort to discern any patterns in why those loans went wrong, and adjust our business model accordingly. Based upon a quick trial balance this morning, the 345 is equivalent to around 19.3% of our current loan book – both in terms of number of loans and absolute dollar value.

Regarding the comments about the poor, I’m only going off what you have said in this thread:
– “payday lending preys upon the more vulnerable in Australia society… the reality is that better-educated, consistently employed people don’t need to borrow short-term.”
– “they know full well that their customer are poor”.

I’m not sure if the lack of taking up hardship is necessarily a sign of vulnerability. Unfortunately I see a lot of apathy in it. For example, I have a borrower who has given notice of hardship citing medical reasons. I have sent them four hardship packs to date, and spoken on the phone twice. I have had no information provided, and no indication of what change they would like to make. Consequently I had to decline to make the change because I couldn’t verify their financial particulars and the legislated time limit ran out. Every single hardship decline I had in 2014 was due to failure to provide basic information, usually coupled with a failure to attend appointments and respond to telephone calls or letters.

I do acknowledge, and agree, that there are unscrupulous lenders in the industry. I want them gone as well. That’s part of the reason I’ve been an advocate for industry reform for over 12 years, and pushed industry licensing and total cost capping. However, your thread is not aimed at unscrupulous lenders – it’s aimed at the industry as a whole. To quote your first line “one of the most damaging influences upon the more vulnerable communities amongst us is the terrible scourge of payday lending.” You don’t make any qualification to that comment, effectively tarring all operators with the same brush.

thanks Rob. That’s a helpful clarification. I hope it’s clear from what I’ve written here that although the legislative definition appears to be any sub-$5k lending (which includes your own business) I have in mind those much smaller loans that appear to offer relief but actually only end up compounding the problem.

As a side-question (out of interest) – how does your auditor consider those doubtful debts? Do you have to provide for them?

Perhaps as we wrap up this thread a couple of concluding comments/observations to bring it all together that we might agree on?

1. There are some irresponsible lenders, but it would be wrong to tarnish all in the sub $5k bracket in this way.
2. Definitions are important, as you note above – the common perception of a short-term lower-value loan is included in the same legislated definition as a $4,500 loan. This doesn’t help us tease out the issues.
3. Lenders have an obligation to adequately credit-score their customers (and, of course, there is a commercial imperative to make sure the loan you offer will get repaid). There is some cost to this which naturally needs to be recouped in the loan.
4. A major area of debate lies around the question of whether it’s moral to lend over the comparatively short-term at what some would consider to be extortionate annualised rates – this is probably the key area that divides us.
5. Education and empowerment for customers is a key issue. While some options for relief are available many customers aren’t aware or simply aren’t empowered to take them up (we see this all the time even when helping people get together information for a No-Interest Loan).
6. Other options are available, but this also comes down to education and empowerment.

Thanks for your contribution Rob. The thread has certainly been much richer for it.

I sincerely do appreciate the frank and open discussion, and the genuine willingness to entertain open minded discussion. It’s rare to get such an opportunity.

In answer to your query, we don’t have an auditor. We’re only a small, self-funded company with a single responsible manager (myself). Consequently, anything that goes bad comes out of our own pocket. The 345 represent debts which have been (in some combination) unserviced for more than 90 days to any degree, where legal action has been taken, and where the borrower is uncontactable/missing, refuses to make payment or has taken advantage of the bankruptcy laws (either Part IX or Part X). Past experience indicates that most of these will be a total loss.

I agree with your points, and note that education/information is a bugbear on both sides of the debate.

In response to the below (new hot water heater) l think this also falls into the category of Galatians 6 v 10………

As we have therefore opportunity, let us do good unto all men, especially unto them who are of the household of faith.

David Ould
January 1, 2015 at 12:00 pm
Jon, again you seem incredibly eager to draw conclusions that aren’t warranted by either the text of the Bible or my own words.

Now, for absolute clarity, you assert,

thank you for letting me know that in business dealings according to you discrimination based on religion is ethical
Everyone discriminates every day on all sorts of bases. Some of it is wrong, some of it is entirely correct or appropriate. Last month I needed a new hot water heater. I was sent to a particular plumber who had a relationship with the church and charity I look after. When I introduced myself his response was “don’t worry, we’ll look after you”. And he did “look after” me as others have before him because of the work that I do. I’m very grateful for it. It’s completely within their discretion and what it signals to me is a wide groundswell of support and participation in the work that we do.

Now this is simply what the Scriptures are saying in this case. God implores the Israelites to “look after” their fellow Israelites. Give them preferential rates. You may consider that “immoral” or use the bogeyword “discrimination” but the reality is it’s a clear direction to them to show grace and favour to their fellow Israelites. And unless you’ve never done anyone a favour because you had an affinity to them (or think it’s immoral), I not sure why you’re complaining. Unless it’s because you have a predisposition to attack the Bible.